Engineering your terms; disputes in manufacturing

We were recently instructed by one of our long-standing manufacturing clients in a dispute regarding unpaid invoices. The client is a subsidiary company of a large engineering group based locally. They specialise in providing customer support, from manufacture to sale of goods and post-sales service, for various market-leading machine tool brands.

The dispute arose when a number of our clients’ invoices were not paid on time by one of their customers. Our client had supplied this customer with a machine and, following damage caused by one of the customer’s operators, our client also carried out repairs on the machine. However, the customer refused to pay for the work carried out.

Despite trying to resolve things amicably, our client reached the point where they felt that having solicitors representing them would be of benefit. In any commercial dispute, there often comes a point where instruction of a professional to represent you helps to alleviate the negative impact that disputes can have on your business, such as time, cost and stress. We quickly got up to speed with the key issues in the case and gained a strong understanding of the client’s business. This included a site visit to the client’s premises which enabled us to see what the client did on a day-to-day basis and meet key personnel.

The customer’s primary line of defence was that the repair work carried out by our client was defective. The customer claimed that this caused the machine to run at less than full capacity following the repairs, and the customer brought a counter-claim against our client for resulting loss of profit. Our client disputed that their work was not up to standard and sought to rely on their terms and conditions to enforce payment.

This type of dispute is not uncommon in the supply of goods and services industry. So, what can businesses do to ensure that they are in the best position possible to bring or defend such claims if they arise? Often, a good set of terms and conditions can make all the difference.

Goods versus services

It is very important to ensure that terms and conditions you are seeking to rely on apply correctly to the circumstances. Put simply, if you are providing goods, have terms and conditions that deal with the sale of goods; if you are providing services, have terms and conditions that deal with the sale of services. If you try to apply terms and conditions for the sale of goods to a situation where services have been supplied, you may run into real difficulty because the other side will likely argue that the terms are not applicable to the given situation. If the terms do not apply, then you cannot rely on them and you will lose any protection they might otherwise have provided, such as limitation of liability clauses.

What has been agreed?

In order for your terms and conditions to apply, you must send them to the customer before the contract is concluded. That way, your terms and conditions are seen as the “offer”, and that offer is being accepted when the customer confirms that they want you to supply the goods / services. If the customer also sends their own terms and conditions prior to the contract being concluded, the parties can get into a dispute known as “the battle of the forms”, arguing over which terms and condition apply to the contract. For more information on this, please see “Whose Terms and Conditions apply – if anyone’s?” It is best, where possible, for both parties to agree at the outset which terms and conditions will apply to any given contract.

Who are the parties?

People often forget, or some simply do not realise, that companies in the same group are not the same company in the eyes of the law. The law deems each company to be a separate legal entity. Therefore if a subsidiary is providing goods or services to a customer, it is crucial to ensure that the subsidiary is a party to the contract, and not just the parent company. If this is not the case and something goes wrong, (1) the subsidiary will be in difficulty when trying to rely on the contract and enforce the terms as they are not a party to the contract, and (2) the parent company will have difficulty bringing a claim arising from issues under the contract because they are not the legal entity that has been affected by any alleged breach of the contract.

Conclusion

Ultimately the case for our manufacturing client settled a sensible commercial figure which both parties were happy with. It is often a misconception that once you instruct solicitors a case will be run to trial. This is far from true and it is often in both parties’ commercial interests to reach an agreed settlement without the need for a full trial of all issues.

Susan advises on all aspects dispute resolution particularly in the financial services sector. She has extensive insurance, professional negligence and restrictive covenants experience. She deals with claims against solicitors, valuers, surveyors, brokers and accountants, fraud issues, recoveries for lenders and bank mis-selling.